The recent announcement by the ministry of finance to provide additional capital to public sector banks to fund loans in the personal loans segment is interesting. The government is evidently going all out to increase the flow of credit to all sectors with focus being on the personal loans segment with the hope that easy, and hopefully cheaper credit, will enthuse households to borrow more and increase demand for consumer goods including automobiles. This can set in motion a virtuous chain of higher industrial growth and provide a stronger foundation for GDP growth. The FY14 budget had already spoken of allocating Rs14,000 crore towards recapitalisation of public sector banks and the message given now is that the budget can accommodate more if the need arises. What is one to make of it?

There are essentially 6 issues which need to be put on the table for debate when viewing such a policy since it sets the precedent of the government actually trying to direct credit into certain areas, which goes beyond the conventional channels of priority-sector lending.

First, there has already been a lot of debate on whether the government should be infusing capital in the public sector banks, and if it is committed to doing so, how long will this carry on. The requirements for capital are challenging looking ahead and given the constraints on the fiscal deficit, it will not be possible to keep supplying capital. Also, at some point of time, which could be after 5 years or 10, banks would be moving towards the road of hastened disinvestment not just from the point of view of operations but also to become global players. Therefore, tinkering with recapitalisation for short-term gains may not be a very good idea as it sends all different kinds of signals.

Second, directing credit to a sector beyond what is defined as priority-sector is curious. There are two issues which come up for discussion. Can we actually differentiate sectors where lending is going from the point of view of capital as money is fungible? Banks can take extra capital from the ministry and map the same with existing personal loans even while using capital, which would have been allocated otherwise to such loans, for other purposes. Further, by directly linking such loans to a sector, the government would be part of the decision-making by banks, which may not be advisable.